Subject: File No. S7-29-98
December 14, 1998
Jonathan G. Katz, Secretary
Securities and Exchange Commission
450 Fifth Street, N.W.
Washington, DC 20549
Re: File No. S7-29-98
Dear Mr. Katz:
Ragen MacKenzie Incorporated is a regional broker dealer and member of the
New York Stock Exchange, Inc. We favor the type of relief which would be
provided by the proposed exemptions. Commission rulemaking in the last
decade has not rendered the proposed exemptive relief unnecessary or
inappropriate.
Some of our U.S. retail clients are unhappy because they are presently being
excluded from an exchange offer in a multibillion dollar international
transaction. The issuer has a limited percentage of U.S. retail
shareholders and is not registering the offer in this country. U.S. retail
shareholders were offered $16 per share. International shareholders are
being offered their choice of $16 per share OR stock in the successor
company. Shortly after the offer was announced, the stock held by U.S.
investors began trading slightly above $16. The legally favored
international investors were able to purchase the shares from the
unfortunate U.S. retail investors, recognizing the downside risk in the
stock was to the cash offer of $16 but that as an international investor,
they could participate in all of the upside potential of the successor
company.
If the shares of the successor company increase before the deal is
consummated, there is the potential for a profitable arbitrage by
international investors which can purchase the shares of the target company
and convert them into shares of the successor company. This potential for
international investors to take advantage of the U.S. shareholders by paying
them less than the international value of their U.S. holdings, is caused by
the U.S. securities regulations. This "favored" group, international
investors, would be able to profit from the misfortune of the U.S. retail
investors who can not convert their stock.
To the companies involved, each of which had several billion dollars (U.S.)
in market capitalization, the U.S. retail shareholders were only a small
percentage of the outstanding shares. They did not want to subject the
entire transaction to the extra expense and possible delays involved in
complying with U.S. securities laws.
As a result, U.S. retail investors are forced to sell their stock in the open
market and incur a commission charge - or be cashed out - recognizing a gain
(or loss) for tax purposes. If they wish to acquire equity in the successor
international entity, they have to make a purchase on the open market,
incurring a commission charge on the purchase. Meanwhile, international
shareholders are able to convert their shares on a tax free basis into the new
entity without incurring any commission costs.
Large U.S. institutional investors often are able to participate overseas in
attractive international mergers or exchange offers through the existence of
offshore offices and thus may not need the proposed exemptions. The main
group the Commission should seek to help is the retail U.S. investor. In
the final rule, holdings of U.S. institutions such as mutual funds, etc.
should be permitted to be excluded from the calculation in determining the
percentage of shares permitted to qualify for the exemption. Otherwise, you
will continue to have the same unfortunate result if the threshold is 10%
and U.S. institutions hold 10% of the outstanding shares and small investors
hold only 3%. If the combined total of U.S. retail and institutional
holdings is over the threshold you set, U.S. institutions may be able to
participate offshore through offshore offices, while the retail U.S.
investors will continue to be excluded.
We favor higher, rather than lower, percentage limitations on U.S. ownership
in order to qualify for the exemption.
The more restrictions on transferability of the securities and the more
conditions which the Commission imposes on foreign issuers to comply with
the proposed exemption, the more likely they will continue to avoid making
the offer in the U.S., perpetuating the inequitable treatment of U.S.
shareholders. To the extent the final rule increases the potential for
litigation in the U.S. which could delay an international transaction, the
rule is less likely to be used.
In some cases, the present Securities and Exchange Commission regulations
result not in "investor protection" but rather harm to U.S. retail investors
who are forcibly cashed out of their holdings while excluded from the
opportunity to receive stock of the successor company in international
exchanges or mergers. The present regulations disadvantage the very
investors they are supposed to protect.
Sincerely,
Ragen MacKenzie Incorporated
Michael W. Reinhardt
House Counsel
MWR:ch